Keurig Dr Pepper (KDP) weathered headwinds from the COVID-19 global pandemic to deliver growth across all four product segments during Q1 2020, with Packaged Beverages helping drive net sales up 4.4% ($2.61 billion), according to an earnings report released Monday.
The company’s diverse range of business interests within food and beverage, each with different levels of exposure to COVID-related economic effects, resulted in a patchwork of wins and losses during the first quarter. Consolidated volume/mix grew 5%, offset in part by lower net price realization of 0.5%. The company completed a strategic debt refinancing earlier this month.
“We delivered Q1 performance in line with our long-term targets, building on the business strength demonstrated since our merger in mid-2018 and setting us up for a strong 2020. However, we are now operating in a distinctly different environment that has required us to pivot significantly,” said CEO Bob Gamgort in a press release.
He added that “while the timing of the macroeconomic recovery remains uncertain, we remain confident in our ability to deliver the guidance we reaffirmed today, particularly our Adjusted EPS and deleveraging commitments.”
Volume/mix growth during the quarter reflected the pandemic’s impact: while state-mandated closures of food service outlets has slowed business in Beverage Concentrates and Coffee Systems, Packaged Beverages (volume/mix up 8.7%) has been a strong performer as consumers shift to at-home use occasions. Contract manufacturing also rose during the quarter.
Net sales for Packaged Beverages were up 9.1% ($1.22 billion), with a slight 0.4% uptick in pricing. The late-quarter surge in retail buying sparked by the pandemic helped drive volume for premium water, CSDs and juice, as represented by evian, Dr Pepper, Canada Dry, Core, A-Shoc, A&W, 7UP and Squirt.
Even as sales were growing, though, challenges related to the outbreak — higher manufacturing expenses; inflation in packaging; a rise in labor, logistics and operating costs — helped partially offset those gains. Operating income for the segment still increased 27% in Q1 ($189 million), thanks in part to a network optimization program gain of $26 million on the asset sale-leaseback of three facilities.
In Beverage Concentrates, net sales growth was stagnant, rising 0.7% to $306 million, compared to $304 million in the same period last year. Shipment volumes fell 2.4% compared to Q1 2019 as on-premise consumption shut down and bottlers saw demand dry up and inventory begin to stack up. Bottler case sales were up 1% during the quarter, while operating income decreased 2.0% to $197 millio
Looking ahead to Q2 and the rest of 2020, Gamgort warned that further declines were coming, particularly for segments heavily reliant on food service. In terms of exposure, he noted that fountain beverages represent 20% of the legacy pre-merger Dr Pepper Snapple business, and thus a smaller piece of KDP overall. Net sales for packaged Beverages are expected to be flat, with declines in premium water and weakness in c-store business. Meanwhile, Beverage Concentrates are projected to be down in the mid-teens.
The pandemic has also sparked a rise in at-home coffee consumption, which has significant implications for KDP. Rather than a one-time stock-up product, Gamgort said coffee is experiencing a “fundamental shift in behavior,” referencing Nielsen data showing a rise in velocity for premium, full-price coffee pods. The company’s analytics show both a significant increase in consumption per machine (“Something we haven’t seen in a long time,” Gamgort said, according to a transcript) and a shift in consumers purchasing Keurig brewers online, a change which has seen the brand adjusting its marketing to build awareness in that channel. At-home consumption is projected to cover losses in away-from-home channels, with net sales in Coffee expected to be up in the mid single-digits in Q2.
“If we think that there’s a recession coming, we will absolutely see more consumption moving in-home, especially as people have discovered how easy it is to make coffee at-home,” Gamgort said.
In his closing remarks, the CEO said KDP expects consumer spending to be impaired after home sheltering orders are lifted and businesses are allowed to reopen, though he emphasized that the company, while assuming a degree of recovery in Q3, has “pressured-tested our P&L to be able to deliver” even in the expected downturn.
“The most important takeaway from this conversation, as evidenced by our comments on this call, is the optionality we have to successfully navigate in this changing environment due to the broad beverage portfolio we manage, combined with our diverse and flexible selling and distribution system,” he said.